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SECURITIES AND EXCHANGE COMMISSION
[Release No. 33-7277, File No. S7-9-96]
Securities Uniformity; Annual Conference on
Uniformity of Securities Law
AGENCY: Securities and Exchange Commission.
ACTION: Publication of release announcing issues to be
considered at a conference on uniformity of securities laws and
requesting written comments.
SUMMARY: In conjunction with a conference to be held on April
29, 1996, the Commission and the North American Securities
Administrators Association, Inc. today announced a request for
comments on the proposed agenda for the conference. This meeting
is intended to carry out the policies and purposes of section
19(c) of the Securities Act of 1933, adopted as part of the Small
Business Investment Incentive Act of 1980, to increase uniformity
in matters concerning state and federal regulation of securities,
to maximize the effectiveness of securities regulation in
promoting investor protection, and to reduce burdens on capital
formation through increased cooperation between the Commission
and the state securities regulatory authorities.
DATES: The conference will be held on April 29, 1996. Written
comments must be received on or before April 25, 1996 in order to
be considered by the conference participants.
ADDRESSES: Written comments should be submitted in triplicate by
April 25, 1996 to Jonathan G. Katz, Secretary, Securities and
Exchange Commission, 450 5th Street, N.W., Washington, D.C.
20549. Comments also may be submitted electronically at the
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following E-mail address: rule-comments@sec.gov. Comments should
refer to File No. S7-9-96; this file number should be included on
the subject line if E-mail is used. Comment letters will be
available for public inspection at the Commission's Public
Reference Room, 450 5th Street, N.W., Washington, D.C. 20549.
Electronically submitted comment letters will be posted on the
Commission's internet web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT: William E. Toomey or Richard K.
Wulff, Office of Small Business Policy, Division of Corporation
Finance, Securities and Exchange Commission, 450 5th Street,
N.W., Washington, D.C. 20549, (202) 942-2950.
SUPPLEMENTARY INFORMATION:
I. Discussion
A dual system of federal-state securities regulation has
existed since the adoption of the federal regulatory structure in
the Securities Act of 1933 (the "Securities Act").1/ Issuers
attempting to raise capital through securities offerings, as well
as participants in the secondary trading markets, are responsible
for complying with the federal securities laws as well as all
applicable state laws and regulations. It has long been
recognized that there is a need to increase uniformity between
federal and state regulatory systems, and to improve cooperation
among those regulatory bodies so that capital formation can be
made easier while investor protections are retained.
1/ 15 U.S.C. 77a et seq.
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The importance of facilitating greater uniformity in
securities regulation was endorsed by Congress with the enactment
of section 19(c) of the Securities Act in the Small Business
Investment Incentive Act of 1980.2/ Section 19(c) authorizes
the Commission to cooperate with any association of state
securities regulators which can assist in carrying out the
declared policy and purpose of section 19(c). The policy of that
section is that there should be greater federal and state
cooperation in securities matters, including: (1) maximum
effectiveness of regulation; (2) maximum uniformity in federal
and state standards; (3) minimum interference with the business
of capital formation; and (4) a substantial reduction in costs
and paperwork to diminish the burdens of raising investment
capital, particularly by small business, and a reduction in the
costs of the administration of the government programs involved.
In order to establish methods to accomplish these goals, the
Commission is required to conduct an annual conference. The 1996
meeting will be the thirteenth such conference.
II. 1996 Conference
The Commission and the North American Securities
Administrators Association, Inc. ("NASAA")3/ are planning the
1996 Conference on Federal-State Securities Regulation (the
2/ Pub. L. 96-477, 94 Stat. 2275 (October 21, 1980).
3/ NASAA is an association of securities administrators from
each of the 50 states, the District of Columbia, Puerto
Rico, Mexico and twelve Canadian Provinces and Territories.
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"Conference") to be held April 29, 1996 in Washington, D.C. At
the Conference, representatives from the Commission and NASAA
will form into working groups in the areas of corporation
finance, market regulation, investment management, and
enforcement, to discuss methods of enhancing cooperation in
securities matters in order to improve the efficiency and
effectiveness of federal and state securities regulation.
Generally, attendance will be limited to representatives of the
Commission and NASAA in an effort to promote frank discussion.
However, each working group in its discretion may invite certain
self-regulatory organizations to attend and participate in
certain sessions.
Representatives of the Commission and NASAA currently are
formulating an agenda for the Conference. As part of that
process the public, securities associations, self-regulatory
organizations, agencies, and private organizations are invited to
participate through the submission of written comments on the
issues set forth below. In addition, comment is requested on
other appropriate subjects sought to be included in the
Conference agenda. All comments will be considered by the
Conference attendees.
III. Tentative Agenda and Request for Comments
The tentative agenda for the Conference consists of the
following topics in the areas of corporation finance, investment
management, market regulation and oversight, and enforcement.
(1) CORPORATION FINANCE ISSUES
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A. Uniform Limited Offering Exemption
Congress specifically acknowledged the need for a uniform
limited offering exemption in enacting section 19(c) of the
Securities Act and authorized the Commission to cooperate with
NASAA in its development. The Commission working with the states
toward this goal, developed Rule 505 of Regulation D, the federal
exemption for certain limited offerings, while NASAA crafted the
complementary Uniform Limited Offering Exemption ("ULOE").
ULOE provides the framework for a uniform exemption from
state registration for certain issues of securities which would
be exempt from federal registration by virtue of Regulation D.
To date, more than half the states have adopted some form of
ULOE. Both the Commission and NASAA continue to make a concerted
effort toward its universal adoption.
A Bill pending in the Congress (H.R.3005) would add a new
Section 18 to the Securities Act of 1933 and prohibit state blue
sky regulation of most securities offerings. Section 18(a) of
this proposed legislation would, with specified exceptions,
preempt state blue sky regulation over any securities registered
under the Securities Act or, subject to a "uniform scheme"
approach, exempt from Securities Act registration pursuant to
Sections 3(b) or 4(2).
The conferees will discuss the possible impact of this Bill
on ULOE, and on state-federal cooperation in general. Further,
consideration will be given to whether there are alternative
exemptive methods which might be suitable for coordination among
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the states and the federal system, either within or outside of
the ULOE framework.
B. Small Business Initiative
On July 30, 1992, and April 28, 1993 the Commission adopted
a number of rulemaking changes, often described as the Small
Business Initiative, which were designed to streamline and
simplify the Commission's regulatory system applicable to the
public sale of securities by small businesses, and to provide new
opportunities for investors, consistent with the Commission's
obligations to protect such investors.4/ Among other things,
the ceiling for the Regulation A exemption was raised from
$1,500,000 to $5,000,000, and issuers contemplating a Regulation
A offering were, for the first time, permitted to use a written
document to "test the waters" for investor interest prior to
assuming the expense of an offering.
The participants will discuss the impact of these changes,
and the need for any additional exemptive relief in the small
business area. The participants will also review their
experience with amended Regulation A and the use of "test the
waters" documents.
On June 27, 1995, the Commission issued three releases that,
if adopted, could provide additional assistance to small
business: a new section 3(b) exemption for certain California
4/ Securities Act Release Nos. 6949 (July 30, 1992) [57 FR
36442]; 6996 (April 28, 1993) [58 FR 26509].
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limited issues5/, relief from Section 12(g) registration for
small issuers6/ and revision of the Rule 144 holding
periods7/. The participants will consider these proposals and
discuss whether they will have a beneficial effect on small
business.
Public comment is invited on the efficacy of the Small
Business Initiative as a whole. Comment is also sought with
respect to any other exemptions that might be developed to
enhance the ability of small issuers to raise capital, while
protecting legitimate interests of investors.
C. Disclosure Policy and Standards
a. Electronic Delivery of Disclosure Documents
On October 6, 1995, the Commission issued an interpretive
release 8/ and related rule proposals 9/ addressing the use
of electronic media to deliver or transmit information under the
federal securities laws. These initiatives reflect the
Commission's continuing recognition of the benefits that
electronic technology provides to the financial markets. These
5/ Securities Act Release No. 7185 California (June 27, 1995)
[60 FR 35638].
6/ Securities Act Release No. 7186 (June 27, 1995) [60 FR
35642].
7/ Securities Act Release No. 7187 (June 27, 1995) [60 FR
35645].
8/ Securities Act Release No. 7233 (October 13, 1995) [60 FR
53458].
9/ Securities Act Release No. 7234 (October 13, 1995) [60 FR
53468].
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releases are premised on the belief that the use of electronic
media should be at least an equal alternative to the use of paper
delivery. However, until such time as electronic media becomes
more universally accessible and accepted, the Commission expects
that paper delivery of information will continue to be available.
Conference participants will consider these matters.
b. June 1995 Initiatives
On June 27, 1995, the Commission issued an additional five
releases, four proposing rule changes and one stating
interpretive positions, to streamline disclosure, facilitate
capital raising and deter abusive practices.10/ The releases
related to executive compensation disclosure11/, accepting
abbreviated financial statements 12/, and permitting
solicitations of interest prior to initial public offerings
13/. The Commission also issued a release 14/ proposing
10/ The Commission issued a release proposing to amend the
financial statement requirements for significant
acquisitions and require reporting of unregistered equity
sales. These issues arose out of a review of offshore
capital-raising practices. See Securities Act Release No.
7189 (June 28, 1995) [60 FR 35656]. In connection with this
review, the Commission also issued an interpretive release
regarding problematic practices under Regulation S, as
discussed below. See Securities Act Release No. 7190 (June
28, 1995) [60 FR 35663].
11/ Securities Act Release No. 7184 (June 27, 1995) [60 FR
35633].
12/ Securities Act Release No. 7183 (June 27, 1995) [60 FR
35604].
1 3 /
Securities Act Release No. 7188 (June 28, 1995) [60 FR
(continued...)
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amendments to the financial statement requirements for
significant acquisitions and proposing to require reporting of
unregistered equity sales. The conferees will discuss the
releases as well as the public comments received by the
Commission.
D. Multinational Securities Offerings
The Commission's recent interpretation of Regulation S,
contained in a release stating its views with respect to certain
practices in connection with offers, sales and resales of
securities purportedly made in offshore transactions pursuant to
Regulation S, 15/ also will be considered by the conferees.
Comment is specifically requested on ways to coordinate federal
and state treatment of multinational offerings.
E. Advisory Committee on the Capital Formation
and Regulatory Processes
In February 1995, the Commission created an Advisory
Committee on the Capital Formation and Regulatory Processes. The
objective of the Committee is to assist the Commission in
evaluating the efficiency of the regulatory process relating to
public offerings of securities, secondary market trading and
corporate reporting. Its deliberations have focused on the
13/(...continued)
35648].
14/ Securities Act Release No. 7189 (June 28, 1995) [60 FR
35656].
15/ Securities Act Release No. 7190 (June 28, 1995) [60 FR
35663].
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development of a company registration system for adoption by the
Commission. Under the model of a company registration system
developed by the Committee, eligible companies would be able to
issue securities relying on a more company-focused, as opposed to
a transaction-focused system.
Companies would register with the Commission and file
periodic reports. Thereafter, routine securities issuances, such
as financings, as well as sales by affiliates and sales of what
are currently known as restricted shares, could be consummated
without significant additional registration procedures.
The Committee has developed three basic goals in connection
with its consideration of a company registration system. The
first goal is to eliminate unnecessary regulatory costs and
uncertainties that impede a company's access to capital, without
impairing investor protection.
The second goal is to eliminate the many complexities
resulting from the current registration system, including the
need for issuers and investors to monitor and maintain the lines
between the public registered market and the offshore or private
unregistered markets.
The final goal is to enhance the level and reliability of
disclosure provided to the markets by all issuers on a continuous
basis, not just when the issuer episodically conducts a
securities offering.
The Committee plans to issue a report containing its
recommendations in the near future. The Commission would then
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consider the recommendations and either propose rulemaking or
legislation, or seek further public comment with respect to the
Committee's recommendations. The conferees will consider issues
developed by the Advisory Committee with a view to coordinating
the federal and state systems of securities regulation.
F. Task Force on Disclosure Simplication
Chairman Arthur Levitt organized the Task Force on
Disclosure Simplification in August 1995 to review forms and
rules relating to capital-raising transactions, periodic
reporting pursuant to the Exchange Act, proxy solicitations, and
tender offers and beneficial ownership reports under the Williams
Act. The goal was to simplify the disclosure process and,
consistent with investor protection, to make regulation of
capital formation more efficient.
To aid its review, the Task Force met over a seven-month
period with issuing companies, investor groups, underwriters,
accounting firms, lawyers and others who participate daily in the
capital markets. These participants helped the Task Force to
identify and formulate reforms that reduce costs and regulatory
burdens without impairing the transparency and integrity of our
capital markets. None suggested wholesale deregulation, and
virtually all emphasized the importance of basic regulatory goals
to preserve orderly markets.
The Task Force recommendations fall into three broad
categories:
(1) Weeding out forms and regulations that are duplicative
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of other requirements or have outlived their
usefulness;
(2) Requiring more readable and informative disclosure
documents; and
(3) Reducing the cost of securities offerings and
increasing access of smaller companies to the
securities markets.
The Conference participants will consider the general
recommendations of the Task Force.
G. Derivatives
During the last several years, there has been substantial
growth in the use of derivative financial instruments, other
financial instruments, and commodity instruments. The Commission
recognizes that these instruments can be effective tools for
managing exposures to market risk. During 1994, however, some
Commission registrant's experienced significant, and sometimes
unexpected, losses in market risk sensitive instruments. In
light of these losses and the substantial growth in the use of
market risk sensitive instruments, the Commission continued its
derivatives initiatives in 1995. Included in these initiatives
was the release of proposed amendments that would supplement
disclosures currently required by generally accepted accounting
principles and Commission rules and make information about
derivative financial instruments, other financial instruments,
and derivative commodity instruments more useful to readers
assessing the market risk associated with these instruments.
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Conferees will discuss this latest Commission initiative, as well
as, the application of federal and state securities laws to
derivatives and other market sensitive instruments.
(2) MARKET REGULATION ISSUES
A. Central Registration Depository ("CRD") Redesign
a. Implementation
The CRD system is a computer system operated by the National
Association of Securities Dealers, Inc. ("NASD") that allows
"one-stop" filing for registration and that maintains information
regarding broker-dealers and their associated persons for
regulatory purposes. The NASD is in the process of implementing
a comprehensive plan to redesign the CRD and to expand its use by
federal and state securities regulators as a tool for
broker-dealer regulation. As a result of the NASD's efforts, the
redesigned CRD system ultimately is expected to provide the
Commission, self-regulatory organizations ("SROs"), and state
securities regulators with: (i) streamlined capture and display
of data; (ii) better access to registration and disciplinary
information through the use of standardized and specialized
computer searches; and (iii) electronic filing of uniform
registration and licensing forms, including Forms U-4, U-5, BD
and BDW, discussed below.
The NASD plans to implement the redesigned CRD in phases.
The NASD plans to begin conducting a two-month pilot test of the
redesigned CRD. Following completion of the pilot test, the NASD
will begin Phase I of the implementation of the redesigned CRD.
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During Phase I, the NASD will convert broker-dealer registration
information contained in the old CRD system to the redesigned CRD
format. During Phase II of the implementation process, the
Commission, the SROs, and state securities regulators will be
provided direct access to broker-dealer registration information
(including information filed by applicants for broker-dealer
registration) contained in the redesigned CRD system. Among
other things, federal and state securities regulators and the
SROs will be provided with the ability to search through hundreds
of thousands of records to: identify problem brokers, flag
problem brokers who have left the industry so that they can be
reviewed should they attempt to return to the business, and
target firms and branches for examination in a more effective
way.
Among other things, the participants will discuss the status
of the CRD implementation process, and issues relating to the
conversion of existing registration information to the redesigned
CRD and electronic filing of uniform forms.
b. Forms Disclosure
In connection with the CRD redesign, NASAA adopted
amendments to certain aspects of Form U-4, the uniform form for
registration of associated persons of a broker-dealer.16/
These amendments did not include amendments to new Item 22-I,
16/ See NASAA Reports (CCH) 4161 (1994). NASAA also adopted
similar amendments to Form BD. NASAA Reports (CCH) 5061
(1995).
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which requires disclosure of certain customer complaints and
proceedings. The appropriate level of disclosure of customer
complaints, as well as settlements, arbitration awards, and civil
judgments, has been the subject of extensive discussions among
the securities industry, NASAA, the NASD, and the Commission.
The participants will discuss the status of these discussions at
the Conference.
B. Books and Records Revisions
The Commission has been working with representatives of
NASAA to develop proposed amendments to the books and records
requirements of Rules 17a-3 and 17a-4 of the Securities Exchange
Act of 1934 ("Exchange Act") to reflect the concerns of the
states. These proposed amendments will include requirements that
broker-dealers maintain additional records relating to such
matters as sales practices, licensing and compensation of
registered representatives, investor suitability, customer
complaints, exceptional or unusual commissions or trading
frequency, due diligence with respect to recommended securities,
correspondence, and marketing materials.
The Commission intends to publish the proposed amendments
prior to the Conference and anticipates that the participants
will discuss the proposed amendments and related issues at the
Conference.
C. Bank Securities Activities
In December 1994, the NASD proposed rules that would govern
the conduct of member broker-dealers operating on financial
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institution premises.17/ The proposed rules are intended to
provide guidance with respect to the activities of bank-
affiliated broker-dealers and third-party broker-dealers
operating on the premises of financial institutions pursuant to a
networking arrangement. The NASD recently submitted to the
Commission a revised rule proposal designed to address a number
of issues raised by commenters with respect to the original NASD
proposal.
The proposed rule change sets forth specific requirements
for members doing business on the premises of financial
institutions as they relate to: (1) setting; (2) networking and
brokerage affiliate arrangements; (3) compensation of registered
and unregistered persons; (4) customer disclosure and written
acknowledgments; (5) use of confidential financial information;
and (6) communications with the public. The Commission
anticipates that the Conference participants will discuss the
NASD's proposed rule change.
D. Regulation of Foreign Broker-Dealers
In October 1995, NASAA adopted amendments to the Uniform
Securities Act to permit Canadian broker-dealers, subject to
certain conditions, to effect transactions for Canadian citizens
temporarily residing in the United States with whom Canadian
broker-dealers have a bona fide pre-existing relationship as well
as in the Canadian retirement accounts of Canadian citizens
residing permanently in the United States, without registering as
17/ See NASD Notice To Members 94-94 (December 1994).
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broker-dealers with the states.18/ Such Canadian broker-
dealers also are exempt from all the requirements of the Uniform
Securities Act, except the antifraud provisions and the
requirements set forth in Section 201-A of the Act. The
participants will discuss the NASAA amendments, particularly in
light of Rule 15a-6 under the Exchange Act, the federal exemption
from broker-dealer registration for foreign broker-dealers
effecting transactions primarily with U.S. institutional
customers. Rule 15a-6(a)(4)(iii) includes a similar, but not
identical, exemption from broker-dealer registration for foreign
broker-dealers effecting transactions with foreign persons
temporarily present in the United States with whom the foreign
broker-dealer has a bona fide, pre-existing relationship.
Participants also will discuss the Uniform Securities Act
provision in relation to the registration requirements imposed by
the Securities Act.
E. Amendments to The Trading Practices Rules
On April 19, 1994, the Commission published a concept
release soliciting comment on anti-manipulation regulation of
securities offerings. Since these rules were adopted and last
significantly amended, there have been substantial changes in the
structure of the securities markets, new kinds of trading
instruments and strategies, enhanced transparency of securities
transactions, expanded surveillance capabilities, and
transformation of the capital raising process. In particular,
18/ See NASAA Reports (CCH) 4861A (1995).
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the rise in the number of, and demand for, multinational
offerings has required careful coordination of the interaction of
the anti-manipulation rules with foreign distribution practices
and regulatory requirements. The dominant themes in the comment
letters were: (i) restructuring anti-manipulation regulation as
non-exclusive safe-harbors; (ii) shortening the cooling-off
periods; (iii) easing the application of anti-manipulation
regulation in multinational distributions; (iv) allowing
investors greater flexibility in conducting non-shareholder
dividend reinvestment and stock purchase plans; and (v) providing
greater flexibility under Rules 10b-7 and 10b-8. With respect to
Rule 10b-6, commenters also recommended: (i) narrowing the
definition of "affiliated purchasers;" (ii) eliminating the "same
class and series" analysis for purposes of debt securities; (iii)
expanding the exclusion for certain Rule 144A transactions; (iv)
permitting the distribution of research reports in the ordinary
course of business; and (v) providing greater relief for basket
transactions. Participants will discuss issues relating to
revision of the trading practices rules.
F. Arbitration
On January 22, 1996, the NASD's Arbitration Policy Task
Force ("Task Force") released its report on securities
arbitration. In particular, the report makes recommendations to
improve the arbitration of disputes between securities firms and
their customers. The participants will discuss the
recommendations made by Task the Force.
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G. Municipal Securities Disclosure
In November 1994 the Commission adopted amendments to Rule
15c2-12 in order to further deter fraud in the municipal
securities market. The amendments prohibit a broker, dealer, or
municipal securities dealer from underwriting a primary offering
of municipal securities unless it has reasonably determined that
an issuer of municipal securities or an obligated person has
undertaken to provide certain annual financial information and
event notices to nationally recognized municipal securities
information repositories ("NRMSIRs") and/or the Municipal
Securities Rulemaking Board ("MSRB") and state information
depositories.19/ The amendments also prohibit those same
entities from recommending the purchase or sale of a municipal
security in the secondary market unless they have procedures in
place that provide reasonable assurance that they will receive
promptly any event notices with respect to that security. The
amendments provide certain exemptions, including one for small
19/ The Division issued six no-action letters recognizing
applicants as NRMSIRs for purposes of Rule 15c2-12 under the
Exchange Act. NRMSIRs will receive official statements,
annual financial information, notices of material events,
and notices of a failure to provide annual financial
information undertaken to be provided in accordance with
Rule 15c2-12. NRMSIRs will make this information available
to the public. The entities that received recognition as
NRMSIRs are: 1) Bloomberg, L.P. of Princeton, NJ; 2) Thomson
Municipal Services, Inc. (a/k/a The Bond Buyer) of New York,
NY; 3) Disclosure, Inc. of Bethesda, MD; 4) Kenny
Information Systems of New York, NY; 5) Moody's Investors
Service of New York, NY; and 6) R.R. Donnelley & Sons
Company of Hudson, MA. In addition, the Division has
recognized state information depositories in Texas, Idaho,
and Michigan.
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and infrequent issuers of municipal securities.
The Division of Market Regulation ("Division") has issued
several letters regarding the application of the amendments. The
Conference participants will discuss these developments and other
matters with respect to municipal securities.
H. Internet Fraud/Electronic Delivery
On October 23, 1995, NASAA announced the formation of a Blue
Ribbon panel from industry, academia, and regulatory agencies,
including the Commission, to consider key areas of federal-state
regulation, including issues relating to the Internet. NASAA
also recently adopted a resolution on the development of a
uniform policy concerning securities offerings through the
Internet. This resolution follows initiatives by various states
to exempt Internet offerings from state registration under
certain conditions. The Commission staff similarly has
established programs to address a wide range of Internet issues.
The Commission staff and NASAA have consulted on these and other
issues as part of the regular communication concerning the
Internet and the use of electronic media.
A leading area of mutual interest to both the Commission
staff and NASAA is cyberfraud, and the Commission staff and NASAA
have ongoing consultations concerning new issues raised. Other
areas of concern include securities offerings through the
Internet; industry retention of electronic records and
communications; computer security; unregistered brokerage,
investment advisory and other regulated financial business
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conducted through the Internet; foreign exchange and foreign
financial sector access to the U.S. through electronic media; and
industry and investor education about the use of electronic media
for securities business.
In addition, on October 6, 1995, the Commission published an
interpretive release expressing its views on the electronic
delivery of certain documents, such as prospectuses, annual
reports, and proxy solicitation materials.20/ As directed by
the Commission in this release, the Division is studying the
feasibility of electronic delivery of confirmation statements, as
well as other information required under the Exchange Act.
The Conference participants will discuss these and other matters
concerning the Internet and the use of electronic media. I.
Continuing Education
On February 8, 1995, the Commission approved uniform
proposals by the MSRB, NASD, American Stock Exchange, Inc.
("Amex"), Chicago Board Options Exchange, Inc. ("CBOE"), Chicago
Stock Exchange, Inc., Pacific Stock Exchange, Inc., and
Philadelphia Stock Exchange, Inc. to implement a continuing
education program for registered persons. This program includes
a Regulatory Element requiring uniform, periodic training in
regulatory matters, and a Firm Element requiring broker-dealers
to maintain ongoing programs to keep their registered persons
up-to-date on job and product related subjects.
20/ Securities Act Release No. 7233 (Oct. 6, 1995), 60 FR 53458
(Oct. 13, 1995).
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A permanent Council on Continuing Education ("Council"),
composed of broker-dealer and SRO representatives, is charged
with the responsibility of providing ongoing input to the
continuing education program. The Council currently is working
on substantial revisions to the Regulatory Element to incorporate
into the program new and more challenging learning exercises.
The Council also is considering the development of a "sales
supervisor" training module. The participants will discuss
issues involving the maintenance and refinement of the program.
J. Compliance Inspections and Examinations Issues
a. Sales Practice Activities/Joint Regulatory
Examination Sweep
In November 1995, the Commission completed a joint
regulatory sales practice examination sweep ("Sweep") in
cooperation with the NASD, the New York Stock Exchange ("NYSE"),
and NASAA (collectively the "Working Group"). The objective of
the Sweep was to identify possible problem registered
representatives and to ensure that appropriate supervisory
mechanisms are in place or, where necessary, to take appropriate
enforcement action against those individuals. The participants
will discuss the results of the Sweep, as well as recommendations
made by the Working Group as a result of the findings.
b. Coordinated Examinations
On November 28, 1995, the Commission entered into a
Memorandum of Understanding ("MOU") with the examining SROs and
NASAA to promote cooperation and coordination among the examining
authorities, as well as to eliminate unnecessary and burdensome
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duplication in the broker-dealer examination process. The key
provisions of the MOU provide for: (1) Annual National and
Regional Planning Summits among the Commission, Amex, CBOE, the
NASD, the NYSE, and NASAA; (2) coordination of broker-dealer
examinations by the Amex, CBOE, the NASD, and the NYSE; (3) a
computerized tracking system for all broker-dealer examinations;
and (4) use of state resources in those areas where they are most
needed.
On February 9, 1996, the National Planning Summit was held
at the Commission's headquarters in Washington, D.C. The goal
was to discuss the coordination of examination schedules and
examination priorities, as well as other areas of related
interest. The participants will discuss the provisions of the
MOU and the actions that need to be taken to fulfill its
objectives.
(3) INVESTMENT MANAGEMENT ISSUES
A. Investment Company Disclosure
In recent years, the Commission has launched several
initiatives designed to improve the usefulness of the information
received by mutual fund investors while at the same time
minimizing the regulatory cost and burdens imposed on mutual
funds. The conferees will discuss ways to improve the quality of
information regarding mutual funds available to investors, as
well as federal and state efforts toward more uniform federal and
state investment company disclosure requirements.
In March 1995, the Commission issued for public comment a
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concept release discussing the ways in which investment company
risk disclosure can be improved so that investors better
understand the risks presented by funds. The Commission received
approximately 3700 comment letters from individual investors and
others in response to the concept release. The conferees are
expected to discuss issues relating to investment company risk
disclosure and the comments the Commission has received.
The Commission has worked with the investment company
industry and NASAA to develop the concept of a "profile
prospectus." The key element of the profile prospectus is a
standardized, short form summary that accompanies the full length
prospectus and is designed to enable mutual fund investors to
better understand what they are buying. Pilot "profiles"
developed by eight fund groups have been available to investors
starting August 1995. The conferees are expected to discuss this
initiative.
The Commission recently approved the delivery of electronic
prospectuses to potential investors as a method of complying with
Securities Act prospectus delivery requirements. The conferees
are expected to discuss the development of various means of
electronic delivery of information to investors in this rapidly
developing area.
The Division of Investment Management has encouraged funds
to write prospectuses in simpler, more concise formats that are
easier for investors to understand. A number of fund complexes
have responded to the Division's initiative and have developed
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"prototype" prospectuses for the Division's review. These
prospectuses are designed to be consistent with current Form
N-1A disclosure requirements and to provide investors with
straight-forward descriptions of essential information about
funds. The conferees are expected to discuss this initiative.
B. Investment Advisers
The Commission has sought to develop alternative approaches
to shortening the inspection cycles for investment advisers. In
a speech at the NASAA annual meeting in October 1995, Chairman
Levitt suggested one such approach would be for Congress to
change the existing regulatory scheme through legislative
action.21/ Under this approach, Congress would delegate
certain registration and examination responsibilities to state
regulators, while the Commission would retain exclusive
responsibility for larger investment advisers, whose activities
tend to be more complicated and have an effect on national
markets. The states would regulate and examine smaller advisers
who tend to operate locally. The conferees are expected to
discuss legislative proposals in this area and other approaches
to improving the efficiency of investment adviser regulation and
examinations.
Toward the same end, the Commission in July 1995 proposed
21/ "The SEC and the States: Toward a More Perfect Union,"
Remarks by Arthur Levitt, Chairman, U.S. Securities and
Exchange Commission, before the North American Securities
Administrators Association, Vancouver, British Columbia
(Oct. 23, 1995).
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improved disclosure requirements for money market funds. The
revised standards would simplify money market fund prospectuses
considerably, making them less costly to prepare and allowing
investors to focus on a short document that contains the most
essential information about the fund. The conferees are expected
to discuss this proposal and the comments the Commission has
received.
(4) ENFORCEMENT ISSUES
In addition to the above-stated topics, the state and
federal regulators will discuss various enforcement-related
issues which are of mutual interest.
(5) INVESTOR EDUCATION
The Commission is pursuing a number of programs for
investors on how to invest wisely and to protect themselves from
fraud and abuse. The States and NASAA have a longstanding
commitment to investor education and the Commission is intent on
coordinating and complementing those efforts to the greatest
extent possible. The participants at the conference will
discuss investor education and potential joint projects in some
of the working group sessions.
(6) GENERAL
There are a number of matters which are applicable to all,
or a number, of the areas noted above. These include EDGAR, the
Commission's electronic disclosure system, rulemaking procedures,
training and education of staff examiners and analysts and
sharing of information.
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The Commission and NASAA request specific public comments
and recommendations on the above-mentioned topics. Commenters
should focus on the agenda but may also discuss or comment on
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other proposals which would enhance uniformity in the existing
scheme of state and federal regulation, while helping to maintain
high standards of investor protection.
By the Commission.
Jonathan G. Katz
Secretary
April 3, 1996